NPR Response: Not creation or extraction — realization.

If you, like me, found yourself listening to NPR Weekend Edition on Saturday, you might have heard the story Are Executives Worth Their Compensation? NPR spoke to Harvard’s Rakesh Khurana (who really needs to update his blog) about the state of things.  I have three responses.

First, Khurana talks about the problem of substituting value extraction for value creation.

He says:

There’s no distinction any more that we make between value creation — that is the creation a products, goods and services that create long term sustainable value — versus value extraction which you can do in a lot of short term ways.

I don’t disagree with this.  But I think he missed a point. The key challenge today isn’t necessarily creation or extraction, it’s realization.  Let me illustrate what I mean with a couple of examples.

Example One – “Create” could be something that earns a patent — for example, Amazon patented the 1-click order.  Extraction might be gathering a licensing fee from companies who want to use it (or suing other people who want to use it without paying a feel).  Realization would be the connecting this technical capability with another situation that would benefit from it.

Example Two – “Create” could be something that earns a copyright — for example, a song.  Extraction would then be either selling recordings of the song or selling the rights to sell recordings of the song.  Realization would be combining this song with something else to create something new and interesting.  Think De La Soul’s “The Magic Number”.  Think any song that uses sampling.

A good executive is able to connect the dots in interesting ways, combine creations in a way that helps them realize their value.  For example, I can write software, but software in a vacuum is pretty pointless.  A good executive will understand the software, understand the problem it solves and how it solves it, and proceed to spread the good news to potential beneficiaries so that it becomes more than it was.

That’s what I mean by realizing value.  It’s a step between creation and extraction, something that combines the best elements of both.  What an executive gets paid for this — that’s beside the point.

Second, Khurana also goes down a rat hole suggesting that businesses should do things because they’re good for society.  I don’t disagree that enterprises can behave in ways that either benefit or harm society, but I do think it’s important to keep in mind that each element will generally do what’s in it’s own best interest and that “should” almost never works.  Enterprises will look out for themselves and should continue to do that.  Society simply needs to do the same.

Whether or not society does that sufficiently right now is open to debate.  My own thought is that we’re out of balance with society not looking out for itself as much as it should.  In theory, we do that together, with tools called “government” and “laws”.  If, as is the case with the financial system, we as a society haven’t looked out for our common interests enough, we have only ourselves to blame.

Before moving on I should also point out that blaming ourselves doesn’t mean we fail to take corrective action now that we understand the problem.  I would argue that this potential for corrective, retroactive action — that’s just another risk that the financial houses exposed themselves to.  That’s part of the game.

Third, Khurana talks about the importance of executives coaching their team.  I totally agree with this.  It is incumbent on any leader in any organization — for profit or not — to build the next generation.  Good call.

OK, now I can go back to work and stop thinking about this for a while.  Have a great one!